How To Reduce Your 2019 Tax Debt Now, in 2020
Yes, you can still make moves to reduce your 2019 tax liability.
And the best part is that, in parallel, you can build up your nest egg to protect your finances in the long run.
While the majority of steps to reduce liability—deductions, write-offs, donations, and so forth—needed to happen in 2019, there are still a few things you can look to do to cut down how much you owe the IRS.
By April 15, 2020…
Move funds or buy assets in an IRA
Did you know there are two main forms of IRAs? Conventional IRAs hold a limited set of IRS-approved assets, as determined by the custodian; think things like mutual funds, stock, and bonds.
A self-directed IRA (SDIRA), on the other hand, can hold any assets that the IRS approves.
Conventional IRAs and SDIRAs can then come in different types: Traditional, Roth, SEP, SIMPLE, etc.
Which specific type of IRA you choose will depend on factors like contribution limits.
While someone under the age of 50 might be capped at $6,000 of contribution to a Traditional IRA in 2019, they can contribute up to $56,000 (or, if it’s lesser, 25% of their compensation) to a SEP IRA.
Except for Roth IRAs, both forms of an IRA allow you to reap the benefits of writing off your contributions on your taxes. You won’t have to pay taxes until distribution, and your contributions will grow tax-free.
Maybe you want to buy stocks in a Traditional IRA, and watch these grow into retirement savings over time.
Or maybe you want to buy and hold crypto in an SDIRA–enjoying the tax benefits of an IRA contribution and legally avoiding the pains of capital gains taxes.
You can leverage the tax benefits of an IRA and also contribute to your retirement savings.
Load up your HSA
A high-deductible health insurance plan comes with a powerful tool in the form of a health savings account (HSA).
You can place money into an HSA tax-free, and use it as needed to pay for approved medical costs.
And as long as you are using these funds for medical costs, you don’t need to worry about penalties.
The deadline for this contribution to count towards 2019 is April 15, 2020.
You can contribute up to $3,500 for an individual, with an extra $1,000 if you’re 55 or older. Contributions to family plans can be up to $7,000.
Interestingly enough, many people are leveraging HSAs as retirement vehicles, which means that this tax deferral strategy is another way you can multitask—also saving for retirement in the process.
An even better than 401(k)s or IRAs, you not only don’t pay taxes when you contribute to your HSA or as your HSA grows, but you also don’t pay taxes upon withdrawal.
This so-called triple tax advantage makes HSAs a very potent tool.
Pick your deduction strategy
Actually, this step is valid even if you received an extension (see the next step).
You have two options for how you file deductions on your taxes: either a standard deduction or an itemized deduction.
You are entitled to use the method that saves you the most.
In the standard deduction, a fixed amount is deducted from your taxable income, no questions asked.
This is how the federal government makes sure that everyone receives some income free of taxation; in fact, many states have their own parallel of a standard deduction.
On 2019 returns, the standard deduction for individual single filers is $12,200, while married couples can file a $24,400 deduction.
However, if you have drummed up a fair share of expenses, your individual deduction might be higher than the standard deduction.
You might find it worthwhile to file an itemized deduction that reflects your individual figure.
The one caveat here is that you should save your receipts and make sure that you can substantiate any deductions you file.
By October 15, 2020…
Leverage your Keogh or SEP IRA
If you filed for an extension, you can contribute to either of these types of IRAs through October 15 and still have it count for the previous year’s taxes.
We’re not tax experts, and so we’re not here to give you direct advice.
For that, you should consult with a certified tax professional, who’ll analyze your particular situation, make sure you are totally compliant with current tax laws, and help you strategize your return.
We are here to share some ideas that you can look into on your own.
You can bring these ideas and any questions you have to your finance pro, who can then give you personalized answers and feedback relevant to your returns.
Category: Taxes
